Legal Considerations: Regulatory compliance for Blockchain Companies

Over the past year (2017), regulatory compliance became a concern for Blockchain companies. Blockchain companies became aware and conscious of the need to comply with legal considerations.

The Internet was once an unregulated playground for all sorts of experimentation to flourish. Technologies like Bitcoin took root quietly, and without much fanfare. However, over the years, Bitcoin and Blockchain technologies became more widely adopted. Given the nature of Bitcoin’s open source code, it was not surprising that the project had been forked and imitated widely.

This year, regulatory bodies worldwide began to take a keen interest into Bitcoin, Blockchain, and the suddenly explosion in the popularity of initial coin offerings (ICOs). As you may know, ICOs have exploded upon the tech scene, helping their creators to raise hundreds of millions of dollars, for the purpose of funding a project, without giving up any shares in their companies. The result is that startups are suddenly able to get funding while retaining full control of their companies.

However, the hack on the DAO, and the ensuing drama, in which there was an “hard fork”, for the recovery of stolen cryptocurrency known as Ethereum, led to the SEC in the US to declare in August 2017 that certain types of coin offerings may be unlicensed securities offerings. This led to the outright ban of ICOs in China, follows by Korea, and a swathe of regulatory rulings popping up in every developed country. Singapore and Switzerland remain favourite destinations for Blockchain startups looking to start an ICO.

The Unregulated Status of Blockchain and Legal Considerations

In some countries, there is no clear regulation on cryptocurrency. Most lay persons imagine that without specific laws to regulate cryptocurrency, and/or Blockchain, they are free to do as they like with their technologies, including running ICOs. They fail to recognise that many countries have existing laws, which deal with various aspects that are relevant to ICOs: laws related to securities, for instance, and laws related to investments. Property laws and company laws may be applicable to Blockchain projects which seek to implement the use cases of Blockchain technology, already so famously outlined in Vitalik Buterin’s earlier papers.

It is highly recommended for Blockchain companies check with a lawyer on any ICO they wish to launch. All ICOs involve the issuance of tokens. It is the type of usage rights, and privileges, attached to the tokens, that are the main issue. Invariably, there will be ICO promoters who wish to promise things that will encourage usage of their token. However, such promises may be dangerous to make, and may sometimes create the promise of a token that have features of securities. (As you can see, there are many legal considerations for the tokens in a Blockchain project.)